Strengthening the Framework for Bankruptcy and Pre-Bankruptcy Proceedings in Croatia Project Report
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STRENGTHENING THE FRAMEWORK FOR BANKRUPTCY AND PRE-BANKRUPTCY PROCEEDINGS IN CROATIA PROJECT REPORT prepared by Mamić Perić Reberski Rimac Law Firm LLC and Schönherr Austria in cooperation with the European Bank for Reconstruction and Development and the Ministry of Justice of the Republic of Croatia funded by the EBRD Shareholder Special Fund April 2018 INTRODUCTION 3 DISCLAIMER 5 DEFINITIONS 6 1. EXECUTIVE SUMMARY 9 2. METHODOLOGY AND FINDINGS 12 2.1 General remarks 12 2.2 Roundtable discussion 12 2.3 Interviews with key stakeholders 13 2.4 Findings 14 2.4.1 Pre-bankruptcy proceedings 14 2.4.2 Bankruptcy proceedings 15 2.4.3 Bankruptcy trustees 16 2.4.4 The use of new technologies in bankruptcy proceedings 18 3. DETECTED SHORTCOMINGS AND RECOMMENDATIONS 19 3.1 General remarks 19 3.2 Pre-bankruptcy proceedings 19 3.2.1 Role of creditors in pre-bankruptcy proceedings 19 3.2.2 Position of guarantors in pre-bankruptcy proceedings 22 3.2.3 Position of secured creditors in pre-bankruptcy proceedings 24 3.2.4 Review of restructuring plans 25 3.2.5 Approval of the regulator of debt-to-equity swaps 33 3.3 Bankruptcy proceedings 35 3.3.1 Opening of bankruptcy 35 3.3.2 Sale of pledged assets 44 3.3.3 Electronic auctions 46 3.3.4 Costs of unsuccessful challenging of claims 48 3.3.5 Wholesale energy trade agreements 49 3.4 Bankruptcy trustees 51 3.4.1 Appointing the appropriate bankruptcy trustee 51 3.4.2 Education of bankruptcy trustees 61 3.4.3 Incentives for restructuring 65 3.4.4 Receipt of correspondence on behalf of debtor 67 3.5 Modern technological solutions 68 3.5.1 Electronic communication between stakeholders 69 3.5.2 Sharing of information 69 3.5.3 Publication of documentation on claims reported by creditors 70 4. CONCLUDING REMARKS 72 INTRODUCTION In 2015, Croatia enacted a new Bankruptcy Act. The Legal Transition Team of the European Bank for Reconstruction and Development ("EBRD") was very active in commenting on such legislation and in policy discussions with the Croatian authorities on the reduction of the high level of non-performing loans ("NPLs") in the banking sector. In February 2016, the EBRD and the World Bank presented a report to the Croatian authorities entitled "Impediments to NPL Resolution", which considered a number of elements relevant to NPL resolution including the need for sound bankruptcy and restructuring frameworks. Later that year (November 2016), the EBRD organised a workshop on out-of- court restructuring. One of the main conclusions of the workshop was that further amendments to the bankruptcy law, coupled with a change in culture were needed to promote in-court corporate reorganisation and thereby also encourage out-of-court corporate restructuring. In October 2017, the Bankruptcy Act was significantly amended to address certain shortcomings that were detected therein. The trends and tendencies of recent legislative reforms are more thoroughly explained in Schedule 2. Even though such legislative changes represent a noticeable progress, further improvements to the Croatian bankruptcy and restructuring regimes are necessary to prevent further NPLs and deliver financial stability and long-term economic performance. To that end, the Ministry of Justice of the Republic of Croatia (the "Ministry") and the EBRD’s Legal Transition Team have launched a cooperation project to address legal and practical issues of pre-bankruptcy and bankruptcy proceedings in Croatia (the "Project"), with the aim to bring together key stakeholders in Croatia in a review of the insolvency legislation and practices. The EBRD is a leading investor and a policy adviser in the region. It has significant experience in addressing legal and practical implementation issues connected with bankruptcy and restructuring frameworks in the region. It plays a key role in legal reforms by, inter alia, developing and implementing technical cooperation projects aimed at assisting local authorities in establishing investor-friendly legal systems. The Ministry is keen to improve its bankruptcy regime and align it with best practices from neighbouring European countries including Austria and Germany. To that end, the EBRD is "Strengthening the Framework for Bankruptcy and Pre-Bankruptcy Proceedings in Croatia" Project Report; MPRR Croatia and Schönherr Austria, in cooperation with EBRD and the Ministry of Justice of Croatia, 2018. 3 assisted by a team of national and international experts, namely the Croatian law firm Mamić Perić Reberski Rimac LLC ("MPRR") and the Austrian law firm Schönherr. MPRR is one of the leading law firms in Croatia whose team regularly advises both domestic and international clients in a variety of legal transactions, including debt collection, bankruptcy and pre-bankruptcy proceedings, and NPLs portfolio sales. Schönherr is a leading full service law firm in Central and Eastern Europe. Its bankruptcy and restructuring team has experience in advising both lenders and distressed borrowers on pre- bankruptcy reorganisation and re-financing. In addition, the team frequently acts as legal advisor in cross-border bankruptcy proceedings and in a number of NPLs portfolio sales throughout the region. The Project encompassed a roundtable event for selected representatives of local stakeholders to discuss impediments of the existing bankruptcy framework in Croatia (see Section 2.2). Also, a set of separate interviews were held with key local market participants and international experts in the bankruptcy sphere (see Section 2.3). The outcome of such roundtable discussions and interviews is comprised in this Report. This document contains key findings of the joint efforts of the EBRD, the Ministry, and MPRR and Schönherr. These findings are based both on their own professional experience, as well as the feedback of stakeholders who have participated in the Project. The objective of this Report is to identify shortcomings in the existing bankruptcy legal framework and to provide specific recommendations in which these could be addressed. The final aim is to improve the Croatian bankruptcy regime and to align it with the best practices from neighbouring European countries, as stated above. The proposed recommendations also aim to improve the practical implementation of legislative solutions while preserving the consistency of the Croatian bankruptcy regime. This should finally result in the change of the current general negative perception of bankruptcy proceedings (as primarily being the procedure for liquidation of assets of the company) by both local market participants as well as international investors, improving the general business environment and practices. "Strengthening the Framework for Bankruptcy and Pre-Bankruptcy Proceedings in Croatia" Project Report; MPRR Croatia and Schönherr Austria, in cooperation with EBRD and the Ministry of Justice of Croatia, 2018. 4 DISCLAIMER This document has been produced releasing EBRD from any liability relative to the selection of MPRR and Schönherr and the quality of their work. In no respect shall EBRD incur any liability for any loss, cost, damage or liability related to the engaging or monitoring of MPRR and Schönherr or as a consequence of using or relying upon their services. EBRD makes no representation or warranty, express or implied, as to the accuracy or completeness of the information set forth in this document. EBRD has not independently verified any of the information contained in this document and EBRD accepts no liability whatsoever for any of the information contained herein or for any misstatement or omission therein. This document remains the property of EBRD. "Strengthening the Framework for Bankruptcy and Pre-Bankruptcy Proceedings in Croatia" Project Report; MPRR Croatia and Schönherr Austria, in cooperation with EBRD and the Ministry of Justice of Croatia, 2018. 5 DEFINITIONS In this document, unless the context explicitly requires otherwise, the following terms shall have the following meanings: administrator means, unless the context requires otherwise, an administrator (Croatian: povjerenik) in pre- bankruptcy proceedings as defined by the Bankruptcy Act. Amendment means the Law on Amendments to the Bankruptcy Act (Croatian: Zakon o izmjenama i dopunama Stečajnog zakona), published in the Official Gazette of the Republic of Croatia, no. 104/2017. Bankruptcy Act 1996 means the Bankruptcy Act (Croatian: Stečajni zakon), published in the Official Gazette of the Republic of Croatia, nos. 44/1996, 161/1998, 29/1999, 129/2000, 123/2003, 197/2003, 187/2004, 82/2006, 116/2010, 25/2012, 133/2012, 45/2013 and 71/2015. Bankruptcy Act means the Bankruptcy Act (Croatian: Stečajni zakon), published in the Official Gazette of the Republic of Croatia, nos. 71/2015 and 104/2017. bankruptcy trustee or means, unless the context requires otherwise, trustee bankruptcy trustee (Croatian: stečajni upravitelj) in bankruptcy proceedings as defined by the Bankruptcy Act. Chapter means a chapter of this Report. Companies Act means the Croatian Companies Act (Croatian: Zakon o trgovačkim društvima) published in the Official Gazette of the Republic of Croatia nos. 111/1993, 34/1999, 121/1999, 52/2000, 118/2003, 107/2007, 146/2008, 137/2009, 111/2012, 125/2011, 68/2013 and 110/2015. "Strengthening the Framework for Bankruptcy and Pre-Bankruptcy Proceedings in Croatia" Project Report; MPRR Croatia and Schönherr Austria, in cooperation with EBRD and the Ministry of Justice of Croatia, 2018. 6 Consultants means jointly MPRR, as local, and Schönherr as international legal advisers specialised in insolvency proceedings in their respective jurisdictions. Croatian National Bank means the Croatian National Bank (Croatian: Hrvatska Narodna Banka), with the headquarters in Zagreb, Trg hrvatskih velikana 3. EBRD or Bank means the European Bank for Reconstruction and Development, an international financial institution established under the Agreement Establishing the European Bank for Reconstruction and Development, a multilateral treaty signed in Paris on 29 May 1990, with its headquarters at One Exchange Square, London EC2A 2JN, United Kingdom. Financial Agency means the Financial Agency (Croatian: Financijska agencija), with registered seat in Zagreb, Ulica grada Vukovara 70.